Income Statements Flashcards
(33 cards)
What is an income statement?
an annual legally required financial document that summarises a business’s historic activity (sales revenue) and expenses to show whether it has made a profit or loss over a time period
Why are there different measures for profit?
To identify issues in stages
How do you build a income statement?
Revenue Costs of sales - Gross profit Fixed overheads - Operating profits Net financing costs - Profit before tax Taxation - Profit for the year
Give an example of an income statement
revenue = 100'000 costs of sales = (40'000) - Gross profit = 60'000 fixed overheads = (25'000) - Operating profit = 35'000 net financing cost = (5000) - Profit before tax = 30'000 taxation = (5700) - Profit for the year = 24'300
What is revenue?
money in from sales
What is cost of sales?
direct variable costs from production
What is gross profit?
gross profit = revenue - cost of sales
What are fixed overheads?
other expenses that are fixed costs
What are operating profit?
operating profit = gross profit - fixed overheads
What are net financing costs?
interest = can be additional or negative
eg bank loan interest (NEGATIVE)
eg bank investment (positive)
What is profit before tax?
profit before tax = operating profit - net financing costs
What is taxation?
the standard rate of profit before tax = 19%
What is profit for the year/net profit ?
Net profit = profit for the year - taxation
What is the best indicator for internal performance?
operating profit as it is inclusive of only internal issues
What can owners do with net profit?
- re-invest it
- put it into research and development
- dividends for shareholders
- keep it for savings and security
What stakeholders are interested in an income statement?
employees shareholders suppliers management government future potential investors
Which profit are employees most interested in?
net profit = job security and wage negotiations
Which profit are shareholders most interested in?
net profit = for dividends, shares and success and trends
Which profit are suppliers most interested in?
net profit = charge more, cost of sales, how much they are costing
Which profit is the management most interested in?
profit before tax = see internal performance
Which profit is the government most interested in?
taxation and net profit = see success and potential performance
Which profit are future potential investors most interested in?
net profit = performance, potential dividends
What is profit utilisation?
is the way in which profit is used ie :
distributed to shareholders
re invested
retained profit
What is profit quality?
a measure of whether profit is sustainable in the long-run.
